WASHINGTON -- Congress has approved a tax package laden with goodies pension plan sponsors have sought for years. That's the good news. The bad is the package is headed for a veto.
Pension lobbyists and employer representatives as well as groups representing participants and older workers already are gearing up to duke it out during the negotiations that would come after President Clinton's anticipated veto.
Plan sponsor groups praised the package lawmakers voted on late last week as one that will stop employers from fleeing traditional pension plans, give aging baby boomers a leg up in saving for their retirement, and let job-hoppers transfer their retirement savings to new employers.
Groups representing participants, older workers and pensioners, as well as liberal think tanks criticized the package as favoring middle-class and wealthy employees.
Brian H. Graff, executive director of the Arlington, Va.-based American Society of Pension Actuaries described the pension provisions of the package as "awesome." If enacted, they would "turn back the trend toward non-qualified plans and reinvigorate qualified plans to the benefit of both executives and rank-and-file workers," he said.
"This really reflects the first time in 15 years that Congress has bitten the bullet and provided us with some greater pension security for employees and made it more attractive for employers to offer plans," said Mark J. Ugoretz, president of the ERISA Industry Committee, Washington, a trade association representing the country's 125 or so largest companies.
Reasonable projection
The tax package would repeal the limit that stops employers from contributing more than 150% of current liabilities to pension funds. Instead, employers would be able to make tax-deductible contributions to their pension funds based on "a reasonable projection of benefits."
Employers also would be able to give higher paid employees a more generous pension by taking as much as $200,000 of their salaries into account, instead of the current $160,000. And workers would be able to receive as much as $160,000 a year in pensions, up from $130,000 under current law. Moreover, middle- and upper-class workers would be able to tuck away as much as $15,000 in their 401(k)-type retirement plans, up from $10,000; and small-business employees would be able to save up to $10,000 a year in SIMPLE plans, up from $6,000.
Workers older than 50 would be able to contribute another 50% of the increased limits to their employer-sponsored retirement plans as well as individual retirement accounts. And employers would not have to conduct non-discrimination tests on these "catch up" contributions to prove they don't favor higher paid employees over rank-and-file workers.
What's more, employer contributions to 401(k)-type retirement plans would not be limited to 15% of pay. Under current law, employers tucking away more than 15% of pay on employees' behalf must pay a 10% excise tax on the amount in excess of the limit.
At the same time, employees also would be able to contribute as much as $5,000 to IRAs by 2008, although that amount would revert to $2,000 a year after that. The package also would allow more top earners to contribute to tax-deductible IRAs, and to convert to Roth IRAs.
But Karen Ferguson, director of the Pension Rights Center, Washington, said, "There are some good provisions for participants . . . but overall the bill represents truly dreadful tax and retirement policy."
Ms. Ferguson observed that half of American workers earn only $30,000 a year. "What this bill does is say that worker will now be able to contribute half his paycheck to a 401(k) plan. What kind of policy is that?"
Peter Orszag, president of Belmont, Calif.-based economics consulting firm Sebago Associates, agrees. Small-business owners, he said, would be less likely to create plans for themselves and employees if they and their spouses can contribute $10,000 annually to IRAs.
What's more, small-business owners could scale back contributions to employer-sponsored pension plans if they are allowed to take more of their salaries into account in calculating pensions.
Rich to get richer
The vast majority of the pension benefits under the bill would accrue to the richest 20% of workers, he said. "Under current law, that top quintile gets two-thirds of the pension benefits, so this bill would further skew the distribution of pension benefits to the top earners," he said.
The Pension Rights Center; the Center on Budget and Policy Priorities, a Washington-based think tank with which Mr. Orszag is associated; and the American Association of Retired Persons also object to the loosening of the "top-heavy" rules that require small-business owners to provide a minimum benefit for lower-paid workers, and to speed up eligibility of their benefits if 60% or more of the benefits from their plans flow to officers, family members and other top-paid executives.
Under the changes approved by Congress, family members would not be lumped together for calculation of pension benefits. Moreover, the definition of "key" employees would not necessarily include family members unless they also made more than $150,000. And employer matching contributions would count toward satisfying the requirements of the rule.
Finally, the bill also would require companies switching to cash balance plans from traditional defined benefit plans to give their workers more information. Under the provision approved last week, employers would need to give workers an example of how they would be affected by the changes before they go into effect, and then give details of how their benefits might be cut within six months after the changes. But while workers would get information on their accrued benefits as of the date of the conversion and get information about the benefit formula for the new plan, they would get no information about their prior plan, such as the formula for calculating benefits.
One Hill staffer, representing a lawmaker seeking more stringent changes, called the provision "a joke."
Portability popular
Meanwhile, both employers and participant groups agree the set of "portability" provisions would make it easier for workers to build their nest eggs by moving retirement dollars among 401(k) plans, 403(b) plans, 457 plans and IRAs when switching jobs.
But the two sides disagree on the rest of the key provisions, including ones that would:
* create new after-tax 401(k)-type retirement plans that would let employees build up their savings tax free within the plan, and not pay any taxes on their savings upon withdrawal at retirement. Employees would be able to contribute to these new "PLUS" retirement plans or the traditional tax-deductible 401(k)-type arrangements, but not both, subject to the limit permissible under law. Employers still would be able to make tax-deductible matching contributions.
* allow employees to withdraw their retirement plan savings in the event of mergers and acquisitions, even if they keep their jobs;
* allow employers to cash out more employees by disregarding rollovers of their retirement savings from other jobs in calculating if their benefits cross the $5,000 mark; and
* allow workers to claim their employers' entire matching contributions after three years if vested all at once, or after five years if vested over time.
